WHEN: Aired Today, May 29, 2019
The following are excerpts from the unofficial transcript of a CNBC EXCLUSIVE interview with McDonald's CEO Steve Easterbrook and CNBC's Carl Quintanilla which aired throughout CNBC's "Squawk on the Street" (M-F 9AM – 11AM) and CNBC's "Squawk Alley" (M-F 11AM – 12PM) today, May 29th.
The following are links to video from the interview on CNBC.com: https://www.cnbc.com/video/2019/05/29/mcdonalds-ceo-on-consumer-confidence-and-efforts-to-strengthen-traffic.html, https://www.cnbc.com/video/2019/05/29/mcdonalds-ceo-alternative-meat-vegan-.html, and https://www.cnbc.com/video/2019/05/29/mcdonalds-ceo-renovations-are-now-a-tailwind-not-a-headwind.html.
All references must be sourced to CNBC.
Steve Easterbrook on Unemployment:
With unemployment being reduced or employment growing -- that's a very positive thing. What we are seeing is a slight defraction in the age though. The consumer confidence in the under-35s is not as high as the consumer confidence of the over-35s, for example. Now, that again is a, fairly sweeping, it's a fact, but it's a fairly sweeping generalization. And you have to get into, you know, region by region, because there are differentiations there as well. But, I think by and large, the consumers are in fairly decent place.
Steve Easterbrook on China:
CARL QUINTANILLA: We did a documentary on McDonald's over a decade ago. And a big part of that piece was about the company's ambitions in China. It was a big, strategic step. And now where does that stand? In light of everything we now know about our-- the U.S. relationship?
STEVE EASTERBROOK: I think inevitably, it remains a big bet for us. Absolutely. We've got new strategic partners there, which was-- so we got new partners within the country now who've actually accelerated the restaurant opening program. So last year, they opened over 400 restaurants in 2018. They opened another 400 restaurants in this current year. It has now become the second largest market, by restaurant number, in our entire 120 markets, just after the U.S. So, we're exactly where we want to be. We've got a really strong presence in the tier one cities. And now, the partners are helping us expand into tier three, four and five cities, going further west through China. And we're confident in the market and we're confident in the partners we've got there.
CARL QUINTANILLA: How do you quantify or characterize risk to the brand, as an American brand. to regulatory pressures in response to something we might do as a country?
STEVE EASTERBROOK: I mean, ultimately, none of this is new to us. Because we operate in 120 countries around the world. So there are always going to be issues as a geopolitical level or a macroeconomic issue. And part of our strength is our diversification. So clearly, we want to be sensitive to it, clearly. But having that local ownership helps localize McDonald's in China. We have a minority partner as well from the U.S., as well. So, I think we have a good balance now between the ownership there and the future we have. And, you know, clearly, wherever we try and establish our business, we will have local supply chains as best we can, local management, local owner operator and localized McDonald's to be as effective as we can. And I think consumers recognize that. Different menus, different tone of voice, you know, different style of marketing. So that I think entirely helps insulate any sort of issues if there was-- if any events unfold.
CARL QUINTANILLA: So, it's fair to say all the recent tension that has not altered McDonald's strategic or tactical strategies in China?
STEVE EASTERBROOK: Absolutely not. In the shorter term, business has slowed down a little bit, just as the economy has slowed down a little bit in China. But in terms of long-term interest, it's a very important market for us and I think will stay that way for as long as I can imagine.
Steve Easterbrook on Construction:
CARL QUINTANILLA: Are we at a point now where the tick up in sales is more than offsetting the loss in sales during construction?
STEVE EASTERBROOK: Yeah, we turned that around the first quarter of this year. So last year it was a little bit of a drag because we were remodelling so many restaurants. We had that downtime that you described. But now we flipped a little bit. So, it's giving us a little bit of a tailwind, as opposed to the headwind, which always helps.
Steve Easterbrook on Performance:
CARL QUINTANILLA: We've been watching you in sort of this investment window for awhile and it's been part of the experience of the future, you've made some high profile acquisitions, and then, you've guided up, I think, G&A went from -4 to flat. Right?
STEVE EASTERBROOK: Yeah. A little bit, yes. Because, I think as we've executed the growth plan, you know, we spent the first two years—so, three or four years ago, turning the business around. Now we've had a couple of years of growth. I think we're confident now that we're beginning to identify further opportunities to further accelerate growth.
CARL QUINTANILLA: What do you think is holding back traffic, right? And when do you start lapping traffic positive?
STEVE EASTERBROOK: Well, I think across the entire sector, traffic is tight right now—
CARL QUINTANILLA: Absolutely.
STEVE EASTERBROOK: And people are eating out less, would you believe or not. And they have been progressively eating out less for a number of years, whether it's the advent of home delivery, for example, which is something we participate in, as you know. But, at the moment, it's just a little bit tight out there. And, so it's a fight for market share. Anyone who is getting growth typically is because they're adding new units. People are finding it hard to get that like for like guest count growth. And it's something that we have stated as an ambition of ours. We think that's a measure of the true health of the business. And last quarter, we did grow traffic. And we've grown traffic the last couple of years. But only modestly. And, you know, we want to-- we want to be stronger than that.
Steve Easterbrook on Investment:
CARL QUINTANILLA: Is it fair to say you're extending sort of this investment window? And at what point-- I mean, obviously, shareholders are giving you the keys because the stock's been hitting new high after new high. But at what point does that become more of a concern for investors?
STEVE EASTERBROOK: Well, I think we need to continue growing, don't we? And I think if where we're investing that money is helping drive growth across 37,000 – 38,000 restaurants, then I think the shareholders and investors would be satisfied. But also, we want to bring our owner operators along with us as well because they're investing their hard-earned dollars, as well. So that always means we've got a business case. You know, the owner operators will want to see a return on their investment, just the same as a shareholder would. So, I think that we've got a wonderful check and balance in the system to help us make sure we spend that innovative money in the right way.
CARL QUINTANILLA: What has dynamic yield brought to you yet, so far?
STEVE EASTERBROOK: A lot of excitement, first of all. So, it was our first acquisition for 20 years. And it was an acquisition in the way that was different from the past. It wasn't looking at different restaurant businesses to try and expand our footprint. It was bringing a capability, an IP and some talent into our business that can help us accelerate the growth model. So, we completed the deal mid-April. Within two weeks, we had that technical capability in 800 drive-throughs here in the U.S. So, it's a very, very rapid execution implementation.
Steve Easterbrook on Alternative Meat:
STEVE EASTERBROOK: We've got a vegan burger going in Germany at the moment. It's on a promotional basis. But, when you look at the whole meat substitute type ideas, I think what will be interesting for us will be to see who is particularly interested in that: Is it an existing customer who wants just an alternative option? Is it bringing a new customer in? So, we're exploring that. We're trying to understand it better. And also understand the-- you know, customers' acceptability of that particular type of product. Because there's a lot of buzz around it at the moment. But, it's clearly prepared in a different way to a traditional beef patty is. So— but we're keeping a close eye on it. And: watch this space.
CARL QUINTANILLA: Your answer on the call about it involved complexity, right? And whether it brings another layer of complexity to the kitchen.
STEVE EASTERBROOK: Well, it undoubtedly does. So--
CARL QUINTANILLA: It does? Just in preparation?
STEVE EASTERBROOK: --undoubtedly does because you've got to obviously separate the tools you use and the grills from beef products because some people, you know, clearly are purchasing it because they are not beef eaters. So, we know there's complexity. The question is will the demand make it worth absorbing the complexity because this will drive the business? I mean, we had a similar discussion maybe four years ago around all-day breakfast, where it certainly adds complexity to the operation, but the demand was sufficient that, you know, we want to find a way to absorb that. So, you know, it's something we're certainly taking a good look at.
CARL QUINTANILLA: Does the buzz feel faddish to you though, on alternative meat?
STEVE EASTERBROOK: I don't-- I don't think it's faddish. Whether it maintains its same level of buzz I think is what's interesting. Because, you know, like any other restaurant business, you want throughput. You want to keep serving the items, so you can keep them fresh and well-prepared.
CARL QUINTANILLA: There's been a lot of sell side research on Beyond Meat, for example. And one of the bullish arguments is that a major QSR customer will sign by year end. And how likely is it-- that that's ends up being McDonald's?
STEVE EASTERBROOK: Absolutely no idea at this stage. But, I mean, the one thing about the job I have is McDonald's attracts attention no matter what it is you're doing. And, you know, clearly, anyone who has something they want to get scale to will often look to McDonald's to be that partner to help scale, in any way, shape or form. So—
CARL QUINTANILLA: Right. Well, if you—
STEVE EASTERBROOK: --we will—
CARL QUINTANILLA: --if you stepped on-- on the scale, I mean, we know what did you did to chicken during-- when McNuggets came around. I mean, the whole market sort of tips on its leg stools.
STEVE EASTERBROOK: And you've also got to look at just the sheer volumes we require. Just because, you know, we serve around the world 70 million customers a day. So if I just take the cage free eggs example here in the U.S., when we made the announcement, that was going to be a, you know, five-year announcement to transition across. Because it takes that amount of time to make sure there is that sufficient supply so you can meet the demands.
Steve Easterbrook on Labor:
CARL QUINTANILLA: Labor. Right, you're under severe pressure now to raise wages. You've instituted some anti-harassment training. But, where is the employee in terms of their relationship to McDonald's? And do you think 15 on a federal level is a reasonable possibility?
STEVE EASTERBROOK: Well, I think overall, if you look around the world actually, not just the U.S., but if you look at all of our both mature and emerging markets, we're finding the labor pool is getting tighter and tighter. And when you're in the service industry, like we are, we have to have well-motivated and fully-staffed restaurants. So yeah, we are working hard and making sure we keep turnover at choose, we keep pay competitive. But it is tight. We're finding this—this tightness has been for a number of years.
Steve Easterbrook on Customer Experience:
STEVE EASTERBROOK: We look to design the restaurants to accommodate each and every need. And I think it's one of the things we tried so hard to do the last three or four years. Because, maybe just four years ago, you could only really order, line up at the front counter, or go traditionally through the drive-through. That was the only two ways you could order at McDonald's. Where as now we've got self-order kiosk, you've got mobile-order pay, you've got home delivery, as well as these kind of evolution of front counter and drive-through. So.
CARL QUINTANILLA: And delivery is now three-billion-five-dollar business?
STEVE EASTERBROOK: Yes. So, 2018 it be-- we built it to a three-billion-dollar business. It's going to be close to a four billion dollar plus, by the end of 2019.
CARL QUINTANILLA: In more than half your global stores, right?
STEVE EASTERBROOK: In more than half the restaurants now. So, we're actually still continuing to expand the number of restaurants that offer it. But now, because we've been in this for almost two years now, we're beginning to like for like sales of those restaurants that are, you know, 13 months and older, we're beginning to see us grow the like for like, as well as expand the footprint, as well.
CARL QUINTANILLA: I want to ask you about the economics of this kiosk. Because obviously-- it's obvious-- it's immediately obvious how much more you can customize your experience.
STEVE EASTERBROOK: Right.
CARL QUINTANILLA: And that all makes sense. But when you're dealing with pressures to raise wages how-- isn't this-- I don't know, is there some liability in the optics of this?
STEVE EASTERBROOK: I think people will ask that question but if you actually look, if-- when we visit the restaurant upstairs, for example, when this restaurant's full, effectively the ordering process is more in the customer's hands, but we're now offering table service to customers in a way that we never did before. So, we'll need less people behind the front counter, that means we can put more people in front of the front counter, actually interacting with customers in a much more meaningful way, actually. So, I think these are different jobs, but customers prefer to order-- many customers prefer to order through the self-order kiosk just because they can just take their time.
CARL QUINTANILLA: And do you think this is-- the appeal of this is generational? Meaning young people are used to not talking human to human, but where as an older customer might have trouble seeing, or—
STEVE EASTERBROOK: A little bit. So, we-- I mean, we learn everything from font size, to layouts, and, you know, we have our guest experience leaders, we call now, which are kind of front of house hospitality staff. They're always prepared to be here to help guide people through who are a little more nervous. But some others will walk straight up and it's so instinctive. I mean, that's how you operate at hotels these days, and airports these days, and many other places. So, we're no different in young people's lives, really, than many of the other businesses they interact with.
CARL QUINTANILLA: You're right. When's the last time we checked into a flight by going up to the per-- you go right to the kiosk.
STEVE EASTERBROOK: But when the-- when the airlines transitioned everyone was, 'Hey, hold on a minute, why are you doing that? I like to stand there and queue up,' but now people just get used to it now. It's instinctive.
CARL QUINTANILLA: Plus, I have to imagine, one last thing on this, I mean-- a burger is-- just the ways you can have fries with salt, without salt, I mean, all that data, you have. Right? And you can manage that in a way maybe you couldn't before.
STEVE EASTERBROOK: Absolutely, right, so you could-- you can see how customers behave then ultimately, let's take it to the next level, which we're not at yet, which is the personalization. So, at the moment customers come up and we don't know who he or she is. But ultimately, as time moves on, we'll be able to make a more personalized connection to customers. You know, maybe you come up and you can scan your phone and you may have already saved that favorites where you like a salt or no sodium, or you like Big Mac but no pickles. So, you know, that is I think where we can take this to the next level, which is to take just a smoother, easier experience into a more personalized, smoother, easier experience. And-- and, you know, we-- that's part of the technology infrastructure we're building. You know, we've-- over the last three or four years with the global mobile app, with the self-order kiosk, with mobile order pay, we've invested a lot of money to put an infrastructure in place, and like an ecosystem in place, but now we're beginning to link it together with things like the acquisition of dynamic yield, for example, and one or two of the other-- if you like-- CRM they call it, customer relationship management, that ability to personalize the experience for those that opt in, and those that choose to have it that way.
CARL QUINTANILLA: So, if I'm willing to identify myself to you next time I can just say, in the future, 'Give me my lunch-- the thing I always get for lunch.'
STEVE EASTERBROOK: It could be voice activated, you may just scan a phone, or I'm not sure if we go down the facial recognition. But, you know, technology is evolving so much, and customers are getting-- or consumers in general are getting more and more familiar and comfortable with it, but it'll always be opt-in. We're never going to invade anyone's privacy. But, yes, that idea of have being able to save your favorites, or call up your last three orders so you-- it just makes that order, you just hit pay, go. I mean, it's-- it just makes that experience so much more convenient, so much more easier. And it means we get the accuracy right, the customer doesn't have to dwell too long going through. I mean, this is part of the evolution of life, generally. It's like what used to be fairly straightforward now appears slightly complex. You know, the advent of Amazon, or the advent of Uber has redefined convenience to consumers and therefore we have to respond to that and make sure we can keep redefining convenience in McDonald's style to our customers.
Steve Easterbrook on "The Fast Eat the Slow" in Business:
But what got you here isn't going to be sufficient to get you where you need to get to. So, it's just having that hunger, that curiosity, that-- that-- that agility that you can be big and fast. Because business, I think traditionally back in the day, the big eat the small. Whereas I think today, the fast eat the slow.
Steve Easterbrook on his Tenure:
CARL QUINTANILLA: Last thing here-- you've been in the company I think 15 quarters now. And in that time, you've changed the food, restaurants, M&A. I just wonder, given the string of-- comp growth, how you feel about your tenure at this stage? We know what the stock's done.
STEVE EASTERBROOK: Yeah. I mean, it's less about my tenure. It's more around, I think, getting the culture of the business one where we've got more speed, more agility, open-minded to taking a little more risk. And fortunately, that has been working. I think we're getting more things right than wrong. So, yeah, so if we complete this current quarter, then that'll be 16 quarters of growth. So, four consecutive years.
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